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Testimony on Chief Financial Officer Audit Findings for FY 1996 by Bruce C. Vladeck, Ph.D.
Administrator, Health Care Financing Administration
U.S. Department of Health and Human Services

Before the House Committee on Ways and Means, Subcommittee on Health
July 17, 1997

INTRODUCTION

Mr. Chairman and Members of the Subcommittee, I am very pleased to have this opportunity to discuss with you the findings of the recently completed Fiscal Year (FY) 1996 Chief Financial Officers (CFO) audit by the Department of Health and Human Services Office of the Inspector General (OIG), and our plan to respond to issues raised by the CFO audit and improve our performance. The Clinton Administration has a long record of efforts to strengthen program integrity and contractor activities and have had successes such as Operation Restore Trust (ORT) and the Medicare Integrity Program (MIP). For the past few years, the OIG has performed audits of selected accounts at the Health Care Financing Administration (HCFA). The FY 1996 audit, which was the first comprehensive audit of HCFA's financial statements and related systems, alerts us to additional improvements that are needed. We are already working to address the concerns noted in the audit.

What is the CFO Audit?

In order to widerstand the CFO audit findings, it is necessary to describe briefly what the CFO audit is, why it was conducted, the separate components of the audit, and the audit findings.

The CFO Act of 1990 (Public Law 10 1 -576) requires HCFA to prepare financial statements that fully disclose its financial position and the results of operation in a manner consistent with financial reporting standards that have long been employed in the private sector, but which differ significantly from prior Government practice. The objective of the Act is to improve systems of accounting, financial management, and internal controls throughout the Federal Government to help reduce waste and inefficiency, and to provide to Congress complete, reliable, timely, and consistent information on the financial status of the Federal Government. The CFO Act and the Federal Financial Management Improvement Act of 1996 require HCFA to comply with Federal accounting standards. For example, financial reporting must be on the accrual basis of accounting (expenses are recognized when incurred, revenues are recognized when earned) rather than on the cash basis of accounting (expenses are recognized when cash is paid and revenues when cash is received). Like other Government programs, Medicare and Medicaid have historically used a cash accounting basis for all budget and reporting purposes. We are currently in the process of making a transition to the accrual basis of accounting.

In 1994, the CFO Act was enhanced by the Government Management and Reform Act requiring Government-wide and Department-wide financial statements. This legislation required the Government Accounting Office (GAO) to audit the Government- wide financial statements and the OIG to audit the Department- wide financial statements. Including both the Medicare and Medicaid programs, HCFA is among the four largest Federal agencies in terms of outlays, thus highly influencing the audit opinion on the Government-wide financial statements.

Since this process is new to all of us, it may also be useful to spend a moment on the terminology auditors employ. In public accounting terms, the purpose of an audit is to permit the auditors to issue a report as to whether the financial statements are presented fairly in conformity with generally accepted accounting principles. For Federal agencies, generally accepted accounting principles are the Federal accounting standards as recommended by the Federal Accounting Standards Advisory Board (FASAB) and issued by the Office of Management and Budget. There are four types of auditor's report; 1) unqualified opinions which means the financial statements are fairly presented; 2) qualified opinion which means the financial statements are fairly presented except for the effects of a matter or matters as described in the auditor's report; 3) adverse opinion which means the financial statements do not present fairly; and, (4) disclaimer of opinion which states that the auditor does not express an opinion on the financial statements and gives all the substantive reasons for the disclaimer.

FINDINGS OF THE CFO AUDIT

In the FY 1996 CFO audit, the OIG raised concerns and issued a disclaimer of opinion on HCFA's financial statements and systems. This is not necessarily an uncommon occurrence for first-year audits. Briefly, the CFO audit findings identified five areas of concern: the actuarial methodology for estimating Medicare accounts payable; the lack of a review of the Supplemental Medical Insurance (SMI) premiums; the substantive testing error rate reflecting improper payments; the records for Medicare accounts receivable; and the retroactive settlement process which was not reviewed by the OIG and caused them to issue a disclaimer. I will discuss each area in the order of the OIG report and later I will outline our corrective action plan.

• For MEDICARE PAYABLES, $36 billion was disclaimed. In other words, the OIG has expressed concern with the methodology used by HCFA's actuaries to estimate payables as well as the lack of a validation process. In FY 1997, OIG contracted with Ernst and Young who provided actuarial auditors to review the Office of the Actuary (OACT) methodology for estimating accounts payable. The Ernst and Young auditors identified several areas where improvements could be made. The current HCFA estimating process is a by-product of the overall process used by our actuaries to make Trust Fund projections. One of the chief concerns is that it is difficult for the auditors to validate, since the payables represent benefits incurred but not yet paid and some of these payments will be made as much as 2 years later. This creates a data set that is very volatile in the short term. However, it should be noted that the payable estimate is used only for financial statement purposes rather than for determining actual payments; our actuaries have traditionally made estimates for other purposes such as the Trustees' Report. HCFA will be working with Ernst & Young to develop a revised process that can be validated.
  
  
• For SUPPLEMENTAL MEDICAL INSURANCE or MEDICARE PART B PREMIUMS, $80.6 billion was disclaimed. The Social Security Administration (SSA) is responsible for withholding premiums from Social Security checks of Supplemental Medical Insurance (SMI) beneficiaries and transferring these funds to the Part B Trust Fund each month. Since the number is material to HCFA's financial statement, specific auditing of SSA must be done. Because the OIG was not able to audit the SSA process this year, the OIG disclaimed the $18.9 billion in Part B premiums, as well as the $61.7 billion Federal matching funds (representing about 75 percent of Part B costs). The OIG has assured us that the issue is resolved and that this Social Security function will be audited for FY 1997.
  
  
• For SUBSTANTIVE CLAIMS TESTING, the OIG found that the majority of our systems and controls are effective. However, the Substantive Claim Testing audit demonstrated that contractor controls were not adequate to detect the types of errors identified in the audit, especially in cases where medical necessity existed but the provider had not maintained the required documentation. These findings are not necessarily a criticism of HCFA's or our contractors' processes but an indication of the fact that providers may not be fulfilling their responsibilities to provide adequate documentation. I will discuss this area in detail at the end of this section.
  
  
• For MEDICARE RECEIVABLES, $2.7 billion (net) was disclaimed. Much of Medicare's financial record-keeping is done by our contractors, under reporting and accounting rules that do not fully meet requirements of the CFO Act. Without an integrated general ledger and accounts receivable system maintained by the Medicare contractors, the OIG and their contract auditors had difficulty reconciling receivable data, as the contractors use many different systems for the tracking and reporting of receivables. The OIG has found that, contrary to HCFA instructions, many contractors do not reconcile the financial reports with their accounts receivable data reflected on the Provider Overpayment Report (POR), which reflects overpayments resulting from the cost settlement process, and the Physician Supplier Overpayment Report (PSOR), which is used to record most overpayments found by carriers. Difficulty following the "audit trail" is partly due to some contractors failing to save the documentation required to support the reports.
  
  
• For the COST REPORT SETTLEMENT PROCESS, $3 billion was disclaimed. The OIG was unable to determine an appropriate methodology to audit the cost settlement process, since this activity involves a fiscal intermediary (171) audit of cost reports submitted by providers. The FIs conduct desk reviews of all cost reports, and also audit some providers' cost reports, using either a full or limited scope approach. HCFA's position has been to focus the limited scope audits on those providers that have a greater potential for overpayment in order to recover misspent Medicare funds and to provide a sentinel effect on all providers. The OIG has not challenged the quality of the current process and, in fact, has recognized its high cost-savings ratio.

Government audit standards would allow the OIG to rely on HCFA's provider audit process if it were based upon a methodology that would select a representative sample of cost reports to be audited. Presently, it is not possible for the OIG to review a sub-sample of the HCFA audits and develop a statistically valid national error rate, or to ensure that the number reported on the financial statement is "fairly represented" as an accurate reflection of HCFA's liability. HCFA plans to work with the OIG to determine how to make the process auditable, and to implement that process,

FINDINGS OF THE SUBSTANTIVE CLAIMS TESTING AUDIT

Appropriately enough, most of the attention surrounding the CFO audit has focused on Substantive Claims Testing. These findings, however, do not impact HCFA's overall FY 1996 audit opinion. First of all, the Substantive Claims Testing audit demonstrated that contractor controls were adequate to; 1) ensure beneficiary and provider Medicare eligibility, through actions such as confirmation of the Provider Identification Number; 2) ensure that payment for claims was appropriate based on information submitted; and 3) ensure that services billed were allowable under Medicare rules and regulations. However, these controls were not effective in detecting the types of errors identified in the audit which originated at the provider level. Medicare, like other insurers, makes payment based on standard claim forms and validates the information submitted only in limited circumstances.

Numerous allegations of high rates of fraud and abuse in health care programs prompted the OIG to review in detail the supporting medical documentation accompanying a sample of claims. We want to note that this is the first time that this type of audit has been done. To the best of our knowledge, no other audit either in the private or public sector has included such a comprehensive review as was done by the OIG in this audit. Since these reviews must be performed by medical personnel from the contractor or PRO, it is costly and time-consuming.

The OIG report on the CFO audit also included an assessment of HCFA's compliance with laws and regulations. The good news is that the CFO audit findings tell us that most of our systems and controls are working. The audit demonstrated that based on the information provided on the claim, payment was correct. However, in a number of cases sufficient medical documentation did not exist to support payment of the service. In fact, the OIG found that 9 percent of improper payments were detected as a result of the look-behind review and were not the failure of our system or controls.

Of the 5,314 claims audited, which were taken from a statistically valid sample, roughly 30 percent were found to be incorrect. From this limited sample, the actual dollars in error were approximately $440 thousand. When these audit findings were extrapolated to the set of all existing claims, the total dollars paid in error were projected to be $23.2 billion, which is approximately 14 percent of the $168.6 billion in adjudicated fee-for-service payments reported by HCFA. Based on the precision of the sample, this estimate could vary from 11 percent ($17.8 billion) to 17 percent ($28.6 billion). Eighty-eight percent of incorrect payments, or approximately $20 billion of the projected dollars in error, occurred in six provider types of services roughly in proportion to total Medicare payments by provider type. The six types of service are'. Inpatient Hospital, Physician, Home Health Agency, Outpatient, Skilled Nursing Facility, and Laboratory.

Almost half the errors identified resulted from insufficient or lack of documentation from providers, and one third of the documentation errors were associated with providers who failed to respond to repeated requests from the OIG to submit documentation. These percentages, however, cannot be extrapolated to the entire Medicare program, because the sample was designed only to yield the overall payment error. This lack of response from the medical community raises some important questions, for which we must find the answers:

• Why don't providers document the reasons for health care services? And why did one third of them ignore repeated requests for medical documentation?
  
  
• Was the care in fact reasonable, but poorly documented, in which case it would still not be reimbursable by Medicare? Or, did we pay when we should not have? The results of this audit should serve notice to the medical community, to document as they were trained or face delayed or denied claims, or other actions.

This is new information for HCFA, and will be key to our future program integrity strategy. It is important to note that the errors reported by the OIG were not evident on the face of the claims, meaning that the error determinations were only made through the "look-behind" review of medical documentation. For example, an incomplete medical history and/or diagnosis may cause the treatment prescribed to be viewed as unnecessary or improper, thus giving the appearance of error or fraud. Because of the significant expense involved in this type of review, the total amount of overpayments might not necessarily be recouped, after the cost of the review is considered.

The Substantive Claims Testing audit findings are extremely disturbing and require HCFA's immediate attention. We have carefully reviewed these deficiencies, and a corrective action plan has been initiated to improve our financial controls.

CURRENT PROGRAM INTEGRITY INITIATIVES

This Administration has already taken action and implemented a number of important initiatives to improve the management of the Medicare program. The OIG has been empowered by the President and the Secretary to implement reforms that will help improve this program. Since the President took office, he has implemented initiatives which have saved billions of dollars. The President's otal administrative costs for all payment safeguard activities were $441.1 million, with an identified savings of $6.2 billion equally distributed between pre-payment and post- payment safeguard activities. This resulted in a projected ROI of $14 dollars saved for every dollar spent on payment safeguard activities (ROI - 14:1).

• For Medicare Secondary Payer, our contractors spent an estimated $109.3 million, producing identified savings of approximately $3,308.6 million, resulting in a projected ROI of $30 dollars saved for every dollar spent (ROI = 30:1).
  
  
• For Medical Review activities, our contractors spent an estimated $128.3 million, producing identified savings of approximately $1,864.1 million, resulting in a projected ROI of $14 dollars saved for every dollar spent (ROI = 14:1).
  
  
• For Audits, our contractors spent an estimated $152.3 million, producing identified savings of approximately $1,017.6 million, resulting in a projected ROI of $7 dollars saved for every dollar spent (ROI = 7:1).
  
  
• For Anti-Fraud, our contractors spent an estimated $51.2 million on payment safeguard activities. The ROI is not applicable to this area of the program because cases are turned over to law enforcement, and recoveries often require several years, while there is no quantitative estimate of deterrence effects.

Last year's Health Insurance Portability and Accountability Act (HIPAA), which the President signed into law, contained provisions establishing a mandatory funotal administrative costs for all payment safeguard activities were $441.1 million, with an identified savings of $6.2 billion equally distributed between pre-payment and post- payment safeguard activities. This resulted in a projected ROI of $14 dollars saved for every dollar spent on payment safeguard activities (ROI - 14:1).

• For Medicare Secondary Payer, our contractors spent an estimated $109.3 million, producing identified savings of approximately $3,308.6 million, resulting in a projected ROI of $30 dollars saved for every dollar spent (ROI = 30:1).
  
  
• For Medical Review activities, our contractors spent an estimated $128.3 million, producing identified savings of approximately $1,864.1 million, resulting in a projected ROI of $14 dollars saved for every dollar spent (ROI = 14:1).
  
  
• For Audits, our contractors spent an estimated $152.3 million, producing identified savings of approximately $1,017.6 million, resulting in a projected ROI of $7 dollars saved for every dollar spent (ROI = 7:1).
  
  
• For Anti-Fraud, our contractors spent an estimated $51.2 million on payment safeguard activities. The ROI is not applicable to this area of the program because cases are turned over to law enforcement, and recoveries often require several years, while there is no quantitative estimate of deterrence effects.

Last year's Health Insurance Portability and Accountability Act (HIPAA), which the President signed into law, contained provisions establishing a mandatory funding base for the Medicare Integrity Program (MIP). This legislation will help provide us the tools to address the concerns raised in the CFO audit. This audit, however, covers a period prior to the implementation of those new provisions. In FY 1997, which is the first year of MIP funding under HIPAA, the total allocations for program safeguard activities are $440 million, with projected savings of $5.3 billion.

HCFA'S CURRENT MEDICAL REVIEW STRATEGY

Our payment safeguard strategy has focussed on areas where we receive the biggest return on investment (ROI). These activities are funded out of HCFA I s discretionary and mandatory funds. We have streamlined our medical review strategies to increase our ROI. The specific components of HCFA's current medical review strategy are:

• Medical Review of Claims: Since 1989, administrative funding for medical review and the percentage of claims reviewed has decreased. In 1990, 16 percent of claims were reviewed with an ROI of 7 to 1. In 1996, the percentage of claims reviewed decreased to 9 percent, yet the ROI increased to 14 to 1. This performance stems from increased efficiency in the use of resources that we have available to target and correct outstanding problems.
  
  
• Currently, about 9 percent of all 800 million claims, representing about $70 million, are reviewed each year on either a pre-payment or post-payment basis. Ninety-seven percent of current medical review savings come from pre-payment reviews. Whenever possible, review is automated to avoid the costs associated with manual documentation review. Many errors, however, cannot be discovered without documentation or some other form of manual review external to the claims. Documentation is not routinely received with the Medicare claims, but instead is submitted on request.
  
  
• Education: HCFA's contractors "educate" the provider billing community, including hospitals, physicians, home health agencies, and laboratories. This education covers current payment policy, documentation requirements and coding changes through quarterly bulletins, fraud alerts, seminars, and, more importantly, via local medical review policy. These efforts offer providers information and guidance that enable them to bill correctly.
  
  
• Use of Data and Innovative Technology - Analysis that leads to the efficient use of resources is critical to our strategy. HCFA and its contractors continue to pursue ways to make available data usable by invoking innovative technology in a number of ways:
  
  
• HCFA's willingness to fund new technology has driven private industry to develop and market software that our contractors use to profile providers, compare utilization trends and patterns and identify claims review priorities. Some of this software utilizes sophisticated methods such as neural netware or fuzzy logic to mine the data for what may not be obvious, thereby enhancing surveillance of fraudulent and abusive practices. HCFA has chosen not to endorse any specific software, but has funded contractors to purchase software so that competition continues and the best state-of-the-art software is produced.
  
  
• We are also utilizing a dedicated statistical analysis contractor to support Durable Medical Equipment (DME) Regional Carriers, who are responsible for payment safeguards in the area of DME, prosthetics, orthotics and supplies. The statistical analysis contractor works closely with the four DME Regional Carriers and produces ongoing analysis of utilization trends, impact of carrier policy and pre-payment review strategy, and unusual payment patterns at the national and regional levels. As a result of this comprehensive examination of utilization, duplicate billing and other aberrant billing practices have been quickly identified and addressed. The continued success of this concept will shape future contracting strategy.
  
  
• At the national level, HCFA is developing and continuing to support the HCFA Customer Information System (HCIS), which provides rapid access to national, provider and beneficiary level data.
  
  
• To prepare for the future, HCFA is also pursuing research and development of long range strategies for data analysis with the Los Alamos National Laboratories that will employ mathematical, computer-based methods to efficiently identify potentially fraudulent or abusive providers and claims on a pre-payment basis.
  
  
• HCFA has been working with the Lewin Associates to develop a methodology for determining a provider compliance rate that will complement the CFO Audit. This rate will indicate the percentage of providers that comply with Medicare rules and regulations and will include review of the documentation supporting the claim. For FY 1998, we will continue to develop this methodology and pilot this prepayment initiative.
  
  
• Current Efforts for Collaboration and Cooperation with Partners - Under the Operation Restore Trust (ORT) initiatives, HCFA and its contractors worked closely with the Office of the Inspector General, the Federal Bureau of Investigation, State Medicaid and State Survey Agencies to seek out and stop fraud, waste and abuse. This two-year demonstration project, which was launched by the President in May 1995 and concluded on March 31, 1997, was designed to demonstrate new partnerships and new approaches in finding and minimizing fraud in Medicare and Medicaid. As a demonstration project, ORT targeted four areas of high spending growth: home health agencies, nursing homes, DME suppliers, and hospices. Because more than a third of all Medicare and Medicaid beneficiaries are located in New York, Florida, Illinois, Texas, and California, ORT efforts were targeted at these five states. Since its inception, Operation Restore Trust has produced returns of $10 for every $1 spent.

HCFA plans to continue the relationships established during ORT. Using monies made available through the Fraud and Abuse Control Account, established in HIPAA, we expanded our successful ORT efforts nationwide using the State survey agencies to be our "eyes and ears" in the field and to report back to the contractors whether providers are meeting Medicare billing as well as quality requirements. In 1997, home health agencies and skilled nursing facilities remain a focus of ongoing reviews done in collaboration with HCFA's partners. Currently, we are developing projects for FY 1998 that will focus on the areas identified in the CFO audit. Seventeen States will participate in a total of 26 HIPAA-funded projects, allowing us to survey approximately 300 providers for both certification and reimbursement issues.

• Medicare Integrity Program (MIP) - The Medicare Integrity Program was enacted to strengthen the Secretary's ability to deter fraud and abuse in the Medicare program in a number of ways. First, it created a separate and stable long-term funding mechanism for program integrity activities. Second, by permitting the Secretary to use full and open competition rather than requiring that we contract only with the existing intermediaries and carriers to perform MIP functions, the Government can seek to obtain the best value for its contracted services. Third, MIP permits HCFA to address potential conflict of interest situations. We will require our contractors to report situations which may constitute conflicts of interest, thus minimizing the number of instances where there is either an actual, or an apparent, conflict of interest.

OUR CORRECTIVE ACTION PLAN

The Administration will take immediate action to respond to the concerns raised by the CFO audit. Our preliminary corrective action plan outlines changes and improvements to HCFA's payment safeguard program. We recognize that a level of tension Will be created by a program that scrutinizes provider billing and requires the medical community to substantiate billing with medical documentation. At the same time, the Federal government is promoting efficiency, less red tape, and less regulation. These two constraints could be difficult to resolve. Many of the actions listed below will in fact be incorporated into the scope of work of our MIP contractors.

• INCREASE THE AMOUNT OF PAYMENTS RECOUPED - Our contractors have denied improper claims and are seeking overpayments for these improper claims identified in the audit. We will also instruct contractors to evaluate the providers identified in the report for more extensive review. For example, we will look more closely at the skilled nursing facility that was paid $15,000 for respiratory and other services that could not be substantiated by medical documentation.
  
  In FY 1997, HCFA will continue working with the contractors to ensure compliance with accounting conventions for proper reconciliation of receivable and payables. These efforts will be supplemented by a review of internal controls in six contractors using the American Institute of Certified Public Accountants' Statement on Auditing Standard Number 70 (SAS-70), Reports oil the Processing of Transactions by Service Organizations. Other contractors will be asked to review and certify the existence and operation of their internal controls, particularly in the area of financial reporting. Also, HCFA will hold a training session in 1997 to ensure that contractors understand the reconciliation process in order to correctly recoup funds. We have begun an analysis of the Intermediary, Carrier, and DMERC shared systems as well as the Common Working File to determine how accounting and reporting processes can be incorporated into these systems. A longer-term corrective action planned for FY 1998 and FY 1999 will be to further implement a single integrated accounting system for the tracking and reporting of receivables as part of the broader process of developing the Medicare Transaction System (MTS).
  
  
• DEVELOP AND IMPLEMENT A SUBSTANTIVE CLAIMS TESTING PROGRAM - The OIG will conduct the substantive testing activities and issue a report in FY 1997 and FY 1998. Pursuant to an agreement with the OIG, FICFA will have a substantive testing program fully operational by October 1, 1998. The program will establish performance measures, employ some level of random review, and include metrics to monitor outcomes. HCFA will replicate the OIG methodology used in the previous audits for the FY 1999 audit. This will allow for consistency and comparison with previous audits.
  
  This corrective action plan will re-engineer our medical review workload and strategy. We are in the process of understanding the required resources to implement this plan. As we work through this corrective action plan and implements its components, we will focus our efforts on the random prepayment review of claims and adherence to medical standards for documentation, which validate the medical necessity and reasonableness of the provided services. We will closely evaluate the successes gained through a reduced national error rate and the correct payment of claims, versus any short term impacts on our ROI. Most importantly, we will make every effort possible to ensure that paid claims are appropriately documented.
  
  
• INCREASE THE LEVEL OF CLAIMS REVIEW - If we could look at every claim and the associated documentation, we could achieve the ideal error rate of zero. However, the reality is that the processing of 800 million claims a year makes a I 00 percent review unfeasible and cost-prohibitive. This initiative will go a step further than the OIG's substantive testing activities by establishing a control system that provides reasonable but perhaps not absolute assurance that payments are made properly. At a minimum the cost of reviewing I 00 percent of claims would be a tenfold increase in medical review cost. Increasing the level of review and requiring documentation with initial claim submissions could have an impact on our ability to process claims in a timely manner. While the audit findings clearly argue for increased and intensified review levels, determining how to attack this problem is an issue which HCFA must, and will, resolve. Some level of review --- between the current 9 percent and the unattainable 100 percent --- will most effectively resolve this problem. Finding the right number is our challenge.
  
  The most commonly billed physician services are the evaluation and management codes. In 1992, in conjunction with physician payment reform, the AMA issued new CPT codes for evaluation and management services. The interpretation and use of these new codes were questioned by the medical community and the carriers, resulting in HCFA instructing the carriers to cease review until documentation could be developed. In 1994, the AMA and HCFA jointly released documentation guidelines and embarked on an educational program. With the completion of the first round of provider education seminars, carriers were given discretion to conduct medical review of evaluation and management codes beginning in September 1995.
  
  In FY 1998, our Medicare contractors will be instructed to conduct a random prepayment review of evaluation and management claims. A detailed implementation plan, including instructions to our contractors, will be developed in the fourth quarter of FY 1997, for implementation in October of 1998. Our plan will include monitoring the effectiveness of the review process and further action will depend on the findings of this random review. We will instruct the contractors to make changes accordingly. Based on analysis of the CFO audit report and analysis of the data, HCFA will expand the scope of services subject to prepayment review of medical documentation.
  
  
• CONTINUE INITIATIVE REQUIRING DOCUMENTATION - Despite anticipated controversy and protest, we will maintain and continue to reinforce the position that those providers who bill the Medicare program are accountable for the documentation to support the payment of a claim. We are requiring that providers follow standard medical practice, which requires careful documentation of health services. This requirement includes entities that bill for services that are ordered, referred or otherwise certified by physicians (e.g., clinical labs, skilled nursing facilities). Critical to this initiative is our ability to require diagnostic information on the claim.
  
  
• INCREASE THE NUMBER OF CONTRACTOR MEDICAL DIRECTORS - Contractor Medical Directors (CMD) are a critical component of all medical review and educational activities. To expand payment safeguard activities in FY 1997, we required CMDs at all carriers and regional home health intermediaries. We use these and other appropriate data to perform surveillance analyses to monitor patterns, trends, and variations in health status and care among Medicare beneficiaries, to identify sentinel events or clusters of events that may indicate less-than-optimal care and to identify, prioritize, and act upon opportunities for improvement. The implementation of the Health Care Quality Improvement Program in 1993 shifted the focus of the PRO program from its emphasis on identifying individual (and often isolated) clinical errors to helping providers and practitioners improve the mainstream of medical care. However, PROs continue to perform mandatory review of a limited number of cases.
  
  
• ENGAGE THE PROVIDER COMMUNITY - HCFA cannot combat fraud and abuse alone. We will continue to seek the help of national organizations and the provider community to take more responsibility for identifying and eliminating widespread fraud and abuse. Although providers have been understandably reluctant to welcome tassistants used in cataract surgery, beneficiary complaints, higher-weighted DRG adjustments, beneficiary requests for immediate review of continued stay notices of noncoverage, concerns identified during project data collection, dumping violations, and referrals from HCFA, OIG, and intermediaries. Work has begun on a system to scan Medicare billings for evidence of unnecessary admissions, which will be supplemented by a narrowly targeted review process to follow up on any leads generated. PROs will use these and other appropriate data to perform surveillance analyses to monitor patterns, trends, and variations in health status and care among Medicare beneficiaries, to identify sentinel events or clusters of events that may indicate less-than-optimal care and to identify, prioritize, and act upon opportunities for improvement. The implementation of the Health Care Quality Improvement Program in 1993 shifted the focus of the PRO program from its emphasis on identifying individual (and often isolated) clinical errors to helping providers and practitioners improve the mainstream of medical care. However, PROs continue to perform mandatory review of a limited number of cases.
  
  
• ENGAGE THE PROVIDER COMMUNITY - HCFA cannot combat fraud and abuse alone. We will continue to seek the help of national organizations and the provider community to take more responsibility for identifying and eliminating widespread fraud and abuse. Although providers have been understandably reluctant to welcome the additional work associated with maintaining and submitting documentation, HCFA is working to facilitate provider documentation, via increased education programs that promote correct coding and documentation. In addition, we have scheduled meetings with professional provider organizations who will be invited to participate in an educational briefing to explain the audit findings and enlist their assistance in addressing the audit's identified problems.
  
  
• CORRECT CODING INITIATIVE - In 1994, HCFA began the Correct Coding Initiative by awarding a contract to AdminaStar Federal for the development of correct coding policy for all physician CPT codes. This contract resulted in more than eighty thousand claims processing edits that bundle services prior to payment. Implemented in 1996, this enhanced pre-payment control and associated software update resulted in savings of about $217 million in its first year.
  
  In FY 1998, HCFA will continue to develop coding policy and edits with a focus on new CPT codes with the potential for high utilization. This project includes ongoing evaluation of the utilization and associated pairing of CPT codes to ensure that all significant CPT codes are included in this initiative.
  
  
• STRENGTHEN PROVIDER ENROLLMENT SAFEGUARDS - Due to the often covert nature of illegal acts, a review of documentation provides no assurance that illegality will be detected. HCFA will impose stricter standards, requirements and post application investigation to prevent those illegitimate providers, bent on fraud and abuse, from admission into the Medicare program in the first place. In FY 1998, proposed legislation will support this ongoing activity by requiring providers to disclose Employer Identification Numbers (EINs), their Social Security Number (SSN) and prohibiting entry into the Medicare or Medicaid Program to individuals or entities convicted of felonies. We are developing a Notice of Proposed Rule Making (NPRM) that would establish much stricter standards for suppliers of durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS). Among other things, this NPRM will establish a requirement that each DMEPOS supplier obtain a surety bond as a prerequisite for participation in the Medicare program.
  
  Implementation of the National Provider Identifier (NPI) is also well underway. This initiative will prevent providers from obtaining multiple billing numbers and distributing billing across contractors. One provider identifier will allow HCFA to track and monitor the complete picture of a provider's billing practice. As these NPI numbers gain universal use and acceptance, we will be better able to identify and, more importantly, track abusive providers who have had numerous billing numbers in the past. A Notice of Proposed Rulemaking (NPRM) will be issued shortly on the NPI.
  
  
• IMPROVE USE OF TECHNOLOGY AND DATA - In FY 1998, HCFA will continue developing and refining the HCFA Customer Information System, which provides rapid access to national provider and beneficiary level data. Proposed additions for FY 1998 designed to enhance identification of abuse include expanded cost data, beneficiary profiles, and detailed HCPCS (HCFA Common Procedure Coding System) and Revenue Center code level analysis.
  
  
• In FY 1998, HCFA is planning a contract for a National Statistical Analysis Contractor. This initiative is modeled after the success of a similar contractor for the DME Regional Carriers, which improved contractor identification of abusive and fraudulent providers. The proposed statistical analysis contractor will also have a new capability to combine Part A and Part B claims data to develop comprehensive beneficiary profiles.
  
  
• Los Alamos National Laboratories (LANL) - As mentioned earlier, LANL is currently investigating new sophisticated statistical methods for HCFA that combine both provider and beneficiary profiles for development of algorithms based on patterns of care that could potentially identify providers at risk for submitting fraudulent and abusive claims. LANL has developed sophisticated computer pattern-recognition programs that quickly spot new types of fraud and abuse, before the claims are paid. LANL methodology will look at unusual data clusters" and refer suspect claims for our analysis. We expect this research to translate methods that can be incorporated into our claims processing systems to enhance the efficiency of claims review and proactively identify providers for review.

CONCLUSION

The initiatives and corrective actions described in this testimony are designed to improve HCFA's record in the future CFO audits, and, in accordance with GPRA, strengthen our ability to monitor and track Program Integrity efforts. However, the degree to which these efforts will influence the error rate is unclear at this time. As we gain experience, these actions will be monitored, evaluated and adjusted in future years to ensure effectiveness.